§ 3.54 p.m.
§ Lord Howe of Aberavon rose to call attention to the opportunities, as well as to the case, for simpler and more user-friendly tax legislation, and to the proposals to that end recently made by the Institute for Fiscal Studies, the Inland Revenue and the Chancellor of the Exchequer; and to move for Papers.
§ The noble and learned Lord said: My Lords, perhaps I may first express my gratitude to my noble friends who have encouraged me in the formulation of today's Motion and supported its appearance on the Order Paper. I am also grateful to noble Lords on all sides of the House who have given notice of their intention to speak today.
§ We owe thanks to several generations of workers on this topic, starting with those who for a number of years have urged the strong case for reforming the whole process of law making as a general matter. For example, more than 20 years ago my noble friend Lord Renton presided over a distinguished committee on The Preparation of Legislation and has argued the cause ever since.
§ My noble friend Lord Rippon was more recently invited by the Hansard Society to produce a further report on Making the Law, again a general one. More particularly in this field there are those who have been pressing the case for improvement in fiscal legislation. Perhaps I may mention the Institute for Fiscal Studies 1717 and the Tax Law Review Committee, of which I have the honour to be the extremely passive president. I pay tribute to the chairmanship of that committee by Graham Aaronson and to the work of his colleagues, including a number in this House. I am glad that today we shall be hearing from the noble Baroness, Lady Seear, who is one of its members, and from a former director of the institute, the noble Lord, Lord Taverne.
§ The other report relevant to the debate is that produced by the Inland Revenue as a result of an amendment to last year's Finance Bill by Timothy Smith. It required the Revenue to produce a report which appeared under the title The Path to Tax Simplification and which received the benediction of the Chancellor of the Exchequer.
My role in this general field I described at too great a length in the debate initiated by the noble Lord, Lord Nathan, almost two years ago. Suffice it to say—and I disclose some sense of guilt—that it is almost 20 years since as Shadow Chancellor I addressed the Addington Society and denounced what I called the:
incoherent drift towards a tax system that is incomprehensible, unrespected, unenforceable—and spinning like a top".
§ Even so, after 11 years in government, almost half of them as Chancellor or Leader of the other House, little has changed since I made that enunciation.
§ It is not that I did not try, but I was certainly unable to mobilise the huge political will which was, and which will be, essential if we are to effect the fundamental changes that are needed. In one respect there has been helpful change since those days as evidenced by the documents to which I draw attention in today's debate. There is now a much stronger head of steam in support of the cause for change. The purpose of today's debate is to help turn that pressure into more solid progress.
§ The problem manifests itself in two ways: first, the surging volume of tax legislation and, secondly, its mounting unintelligibility or inaccessibility. There is all too often a tendency to justify the situation by saying that the problem is world-wide. Indeed, it is. During the past quarter of a century our tax law has grown from 2,000 to 6,000 pages. The Australians have doubled theirs in the past 10 years, and many other nations suffer the same fate. However, we cannot accept that growth with hand-wringing inevitability and do nothing about it. We do not have the option of doing nothing.
§ The problem falls into two halves: to improve the quality of legislation yet to be born; and if we are to achieve that, it is essential to improve the quality of that which already exists. That is a much longer and more difficult task.
§ Some people believe that we might achieve that by searching for a better, simpler tax policy. Of course, policy is relevant to the objective of simplification in the sense that policy makers should always have it in mind as a consideration. However, in a debate on the Finance Bill in April 1994 my noble friend Lord Cockfield, who was kind enough to include me among the Chancellors who from time to time had simplification as an objective, pointed out that the policy changes cannot be sufficient to achieve the cause of 1718 simplicity. Canada, for example, appointed the Carter Commission to achieve global simplification of tax law. The results of that were described in retrospect as Mr. Trudeau's "economic Vietnam". In this country we need no reminder of the fact that simple motivation for tax change implies many losers as well as winners and often does not work as well as expected. I mention sotto voce the poll tax.
§ But the objective of simplicity must always be a dominant consideration. We should not disregard it, but we cannot regard it as offering anything like the complete answer to the problem of simpler taxes. The most important factor is whether we believe it is possible at all to achieve improvement in the quality of our tax legislation. I am happy to say that all who have considered the question reply with a strong affirmative.
§ Plain language law, law which is user friendly, is obtainable. The Tax Law Review Committee and the Inland Revenue agree on the key components: a clearer structure of what you are trying to do; much shorter sentences; and modern design, modern layout and headings that help the reader. Of course, simplification cannot be at the cost of clarity. You have to balance the two. But one cannot seek complete precision at the price of infinite prolixity.
§ The fact that one can make those improvements is clear from the examples contained in the appendices to the reports to which I have drawn the attention of the House. I suspect that I am not alone in preferring the more radical approach of the Tax Law Review Committee to that exemplified by the Inland Revenue. The Tax Law Review Committee's approach coincides with the style of the Special Committee of Tax Law Consultative Bodies which offers a sample of legislation—what it calls rent-a-room relief. The verdict of the writer in the periodical Taxation is one which I welcome. He described the TLRC's redraft of roll-over relief as "magnificent".
§ There is no dispute that plain language can bring huge benefits. It can bring about a reduction in compliance costs. It is estimated that the cost of compliance for Inland Revenue taxes alone amounts to some £4 billion per year. It can help us to ease the process of future policy reform if we enable future finance Bills to be simpler and clearer. But, if that is to be achieved, it will require a very substantial culture change for everyone involved in producing fiscal legislation. The TLRC emphasises that. There is no doubt that that culture must change.
§ We need to have and to enforce stricter rules to secure more advanced decision-making, fewer last minute scrambles. There should be no law making on the hoof; no Dangerous Dogs Acts. There should be—in two words—more time. We need more human resources, above all, in the engine rooms of parliamentary draftsmanship—in the Revenue departments as well as in the Office of Parliamentary Counsel.
Parliamentary counsel are often criticised—I see my noble friend Lord Carr sitting there; he will join me in this—for what has been described as an unduly,
rigorous, arcane and somewhat inflexible craft-tradition".
Without disclosing any secrets, I recollect that at the time that my noble friend and I were setting about the draftsmanship of the Industrial Relations Act in 1970, we dared to suggest to senior parliamentary counsel at the time that it might help if words which were defined in the definition clause were printed in italics—as now recommended by the TLRC. That simple proposition evoked a five-page reply telling me why that was not possible.
§ But I must not be unfair, because parliamentary counsel need time to do their work properly and we do not often give it to them. They need their resources strengthened. And we have had much help from them for the TLRC and, in particular, from the presence there of Sir Peter Graham, who was First Parliamentary Counsel until 1994.
§ As I said previously, if the process is to work, it needs a senior Minister (or ministerial group) in overall long-term charge. Theoretically, the Prime Minister is responsible, but I dare say that he is too busy. The Attorney-General by himself is not strong enough. One needs to integrate and draw together the authority of the Leaders of both Houses, the Attorney and the Lord Chancellor.
§ Even then, we need to agree on what we are setting out to do. We need to commit ourselves to a rewrite, over a period of not more than five years, of all fiscal legislation. We should start with the taxation of income, as the TLRC suggests, and have a pilot scheme in that area. There is no reason why Customs and Excise should not look at its area too.
§ There are many key propositions which I believe need further consideration but to which at this stage we should give only provisional answers. Should we opt for what is called purposive legislation? More statements of purpose are desirable but I am doubtful whether the concept of "purposisation" should be "totemised" as an answer to the problem.
§ Should we consign more to secondary legislation? Up to a point maybe, but if we look at the way in which we handle secondary legislation at present, which the Rippon Committee described as "highly unsatisfactory", I am not confident that that would be the right way forward.
§ We must recognise that the process will involve more than mere consolidation. It should allow for the recommendation of at least minor changes. But those too will need parliamentary endorsement. Should we hand over the management of all the details to a new extra-parliamentary body? I confess to little enthusiasm for that because in my days as Minister for Trade and Consumer Affairs I established a body called the Consumer Protection Advisory Committee with the intention that that should do the same in the field of consumer affairs. One of its early chairmen was the noble Lord, Lord Borrie. It was by no means a success, but that was probably my fault rather than his.
§ But we do need institutional changes. Outside Parliament the planning work and the shaping of proposals must be done by a specialised body. I do not think that that should be a Royal Commission. It should not be as detached as the Law Commission. Rather, it 1720 should be a joint project team, a working party, drawing together the talents of the Revenue and the private sector.
§ There is a question about who should be in charge of that. I think there will probably be a need for continuous ministerial leadership, as well as parliamentary oversight.
§ Finally, we need to concentrate on what changes are necessary in Parliament itself. In that context, there is a clear need for special legislative vehicles, special tax simplification Bills, and an equally clear need for a special track for the processing of such Bills. If we get that right, that may well pave the way to an acceptance of the notion of a regular annual Tax Management Bill as part of but distinct from the regular Finance Bill routine.
§ The experience of both Houses now, although still quite limited, very strongly supports the case for handling such legislation by means of a Special Standing Committee. The House of Commons Procedure Committee recommended that frequently for that House, and in this House that has been recommended by the committee presided over by my noble friend Lord Jellicoe. In both Houses it has been relatively little used so far.
§ The Law Commission produced a report in November 1994, Parliamentary Procedures and the Law Commission. It asked why the Special Standing Committee procedure had been used so seldom when in both Houses it has been regarded by those who have tried it as a great success. My right honourable and learned friend Sir Patrick Mayhew, for example, has commended it very enthusiastically more than once.
The reasons given by the Law Commission paper were, first, that a Special Standing Committee is:
Not popular with either of the Departments or business managers";
All that is lacking is the necessary will of the Government Department".
I plead guilty in that respect also because that procedure was never used in my time as Leader of the House of Commons.
§ Finally, one must consider the relationship between the two Houses on this matter. Can there be a role for your Lordships' House in this field, notwithstanding the fact that Bills will concern either money or supply, on which we are precluded from making amendments? The Tax Law Review Committee answers that by saying no, but I believe that it would be a great pity so to conclude when one sees the outstanding role played by this House in connection with Law Commission Bills and thinks of the presence in this House of fiscal experts ranging from Law Lords like the noble and learned Lords, Lord Nolan and Lord Simon of Glaisdale, to my noble friends Lord Cockfield, Lord Rees, Lord Boyd-Carpenter and Lord Hayhoe, who are to speak later.
§ If this House is to have a role in that field, does it make sense to have separate Special Standing Committees? It is difficult to believe that it would be useful for outside experts to be involved in giving 1721 evidence to two separate parliamentary committees on each piece of legislation. Perhaps my most radical proposal is to ask whether there is a case for establishing, to handle that task, a joint Special Standing Committee of both Houses, albeit with Members of the House of Commons in the majority. There is only one precedent in the non-fiscal field for such a Joint Special Committee. That was on the Highways Bill in 1958–59. But is that not a change that would make sense? It would maximise the impact of the expertise in both places and secure a legitimate role for your Lordships' House.
§ I have closed on probably the most important procedural question, at least so far as concerns this House. Those are some of the questions on which my colleagues and I on the Tax Law Review Committee will concentrate in the preparation of our final report and on which I believe the authorities in the Treasury, in the Inland Revenue and in both Houses should now be focusing their attention. It would perhaps be suitable for all of them to bring their reports to a conclusion together, ahead of the probable date of the forthcoming general election so that early practical arrangements can be put in place for a new Parliament by a freshly elected (or, as I should hope, a freshly re-elected) government. My Lords, I beg to move for Papers.
§ 4.10 p.m.
§ Lord Taverne
My Lords, as usual, I find myself in almost complete harmony with the noble and learned Lord, Lord Howe of Aberavon. We have co-operated on a number of reports in the past and, once again, on the question of tax reform, we find that we are very much at one. I too very much welcome the reports that we are debating. I find that the report of the Inland Revenue is a very positive document, especially on the central issue of the rewriting of tax law. However, I want to concentrate on the report of the Tax Law Reform Committee issued by the Inland Revenue.
First, perhaps I may tell the House that I take special personal pleasure in the quality of the reports produced by the Institute for Fiscal Studies. I very much appreciated the friendly remarks made after my maiden speech by the noble and learned Lord, Lord Simon of Glaisdale. Certainly, looking back on the vagaries of my career, what gives me the most sense of satisfaction is the fact that I played some part in the setting up of the Institute for Fiscal Studies. After I left the institute it really started to prosper and it now goes from strength to strength.
I approach the discussion of this kind of issue with great humility because I am by no means an expert on the technicalities of tax. It takes a very brave critic to question the judgment of the very learned members of the Tax Law Review Committee or, indeed, to take on or tangle with the Inland Revenue on technical issues. I should like to make a few comments. First, I want to echo what the noble and learned Lord, Lord Howe, said on the importance of the issue. It is indeed of very considerable economic importance. Tax compliance alone, for which the noble and learned Lord gave figures, amounts to over 1 per cent. of GDP. It is not just a question of the cost; it is also a question of justice.
1722 We may not be entitled to expect complete certainty in tax law. Perhaps sometimes we err too much in our devotion to the search for certainty which is a very illusive concept and that search often leads to unduly complex legislation. If we are not entitled to expect certainty, we are entitled to expect the lack of total incomprehensibility. An example was given in the report of the Tax Law Review Committee. At page 33, the report cites one part of the National Insurance Act 1946 which I believe is worth reading to your Lordships:For the purposes of this Part of the Schedule a person over pensionable age, not being an insured person, shall be treated as an employed person if he would be an insured person were he under pensionable age and would be an employed person were he an insured person".I remember at one stage that I tried to find out what the definition of "income" was for the purpose of income tax legislation. The conclusion that I came to was that the only meaning that the word could be given was that it is a particular form of increase in wealth which is subject to income tax legislation—a totally circular definition.
How can we avoid that nonsense? How can we improve the law and achieve a greater degree of comprehensibility? There are two main recommendations made in the interim report from the Tax Law Review Committee. The first is greater use of explanatory memoranda. That certainly seems to me to have a great deal to commend it. It is much more satisfactory than finding out the purpose of a particular piece of legislation by referring to Hansard. It may be that there is a very clear explanation in the speech of the Minister introducing a particular tax measure, but it has not been outside the experience of the other place that the Minister does not altogether understand the tax law that he is introducing. All right, the brief is probably written for him or her by the Inland Revenue or Customs and Excise, but odd comments may be made in the course of the speech, there may be answers to questions, there may be a political spin given to it; indeed, there may be all sorts of reasons why Hansard is not necessarily a very accurate guide.
A clear explanatory memorandum or memoranda for different clauses is a much more satisfactory guide and a most important one. It is an important democratic principle that legislation should be interpreted in the way in which the Government, as sanctioned by Parliament, intended.
However, much the most important recommendation—indeed, the absolute centre of the reforms—is that the primary legislation of tax should be rewritten in a simple way. I was delighted to see that the Inland Revenue has accepted that task and that it reckons, perhaps to my surprise, that it could be done within five years. We should remember why that is so important. Again, perhaps I may quote from a section of the committee's report where it deals with the fact that tax legislation tends to be built on previous legislation. Paragraph 3.6 at page 18 says:Each year's Finance Act has built upon the structure left by the previous one so that we now have a huge edifice that bears little resemblance to the original, modest single-story block from which it has slowly metamorphosed".1723 That is the trouble. One cannot really clarify the law unless one starts, as it were, by rewriting the whole.
The only regret that I have from the report—and which, as I understand it, is now to be remedied—is the fact that it does not mention the very important way in which we can improve the scrutiny of legislation. Obviously we want to get away from elaborate schedules. Sometimes it is the fault of politicians that so much goes into a schedule. I remember one occasion when the Chancellor said, "I want a short Bill", but the Inland Revenue said, "Yes, but we have to get this and that in". So the temptation arose and the question was put, "Can we not put it in the schedule?" There is very little scrutiny of a schedule and often very little understanding of it. In fact, it has always been the case that schedules have not necessarily been scrutinised.
Some noble Lords may know the apocryphal story of the town clerk in Birmingham in the 19th century, when divorce was only possiblle by an Act of Parliament, who was, unfortunately, unhappily married. It so happened that he was responsible for drafting a very complex local water Bill. When the legislation was finally passed into the law there, hidden away in the corner of its schedule, were the words, "The Town Clerk's marriage is hereby dissolved".
The question is: how can we effect better scrutiny? As the noble and learned Lord, Lord Howe, said, part of the problem is time. Indeed, the pressure on time can be very considerable. I remember that the pressure of time on one occasion was such when I was in the Treasury that we found ourselves debating highly technical provisions in the early hours of the morning. At that stage, two Ministers were in charge of the Bill. My colleague was the late Lord Harold Lever. One of the Members of the Opposition asked, not unreasonably, "Can we know which of the two Ministers is answering the debate, so at least one of the two can wake up?". Well, it was true that both of us were asleep, but it was in fact Lord Lever's particular debate. Never has my admiration for that learned and witty man been greater than it was then. He jumped up, straight out of deep sleep, and said to his opponent, "The Hon. Member would no more be justified in inferring from the fact that our eyes are closed that we are asleep, than we would be in inferring from the fact that his eyes are open that he is awake".
It is of supreme importance that we have proper scrutiny. The answer must be a permanent Standing Committee to look at tax. That committee could have three functions of great importance. First, it could look at the technical changes. The point is often made that it is sometimes difficult to distinguish between technical changes and the mainstream kind of policy changes contained in finance Bills. It may sometimes be difficult to distinguish, in which case it should be kept in the main body of the Bill. However, there are other occasions when it is clear that changes are technical. They should be considered by a Standing Committee.
Secondly, such a Standing Committee could also look at the periodical reports from the review of legislation being carried out by the Inland Revenue—the re-write of the primary tax legislation. Thirdly, it could look at 1724 proposed changes in tax law. A very good report was produced when it was proposed that there should be a wealth tax. Proposals for all sorts of new taxes could be examined by such a committee. More MPs would become knowledgeable; there would be less pressure of time during the Finance Bill; and the quality of taxation could be greatly improved.
§ 4.21 p.m.
§ Lord Brightman
My Lords, I would like to take the opportunity provided by this very useful debate to address one point only, and that is the urgent need for the simplification of the capital gains tax system for the benefit of the ordinary investor. I trust that in doing so I am speaking within the intention of the debate, notwithstanding that I am descending from the general to the particular.
Basically, capital gains tax is a very simple tax and not an unfair tax. I do not seek its abolition. I ask only for a more user-friendly structure.
As your Lordships will know, in essence, the tax is this: if the sale price of a share exceeds the purchase price, you deduct one from the other, and that is a capital gain which is taxable above a certain level. Nothing could be simpler or easier.
The complication arises from the fact that a gain is taxable however many years it took for that gain to mature, up to a total of 16 years; that is to say, from March 1982 to the present day if the share has been held for that length of time, or from the date of purchase if it was bought after March 1982. But money has fallen in value by over 80 per cent. since March 1982. Consequently, it has been recognised that it would be unfair to tax a gain which has resulted only from the fall in the value of money and not from any real increase in the value of the share. There has therefore been built into the capital gains tax legislation what is called an indexation allowance. It is here that the complication starts.
To calculate a taxable gain you have to take five steps, which I must regretfully explain to your Lordships in order to sustain my plea for a simpler tax structure. Step one: you deduct the retail prices index at March 1982, or at the later date of purchase, from the RPI at the date of sale in order to obtain an adjusted RPI. Step two: divide the adjusted RPI by the RPI at the date of purchase in order to obtain a re-adjusted RPI. Step three: you multiply the cost price of the investment by the readjusted RPI in order to obtain the indexation allowance. Step four: you add the indexation allowance to the actual cost price in order to obtain the adjusted cost price. Step five: you deduct the adjusted cost price from the sale price and there is your taxable gain.
However, that is not the end of the agony. It is only the beginning. If rights issues have been made during the time that the share has been held, the same exercise has to be gone through for every such issue, because there will be a different RPI at the date of the rights issue from that which prevailed at the date of the purchase of the share.
Furthermore, if the investor has been trying to save by accumulating dividends—that is, by using dividends to buy more shares, which is a popular way of saving in 1725 these days—the exercise which I have outlined will have to be carried out every time a dividend is declared. So, at the end of the day, there may be 28 occasions in the case of a single investment where it is necessary to carry out this procedure if the share has been held since 1982. Of course, all this assumes that the shareholder has kept immaculate records of the history of his investment over the years that he has held it.
Of course, what happens in practice is that the investor throws up his hands in horror and passes everything over to his accountant at £100 an hour, or whatever is the going rate for an accountant. To me, the case seems overwhelming for another look at capital gains tax in order to avoid these horrors.
If capital gains tax on ordinary Stock Exchange investments were limited to gains made, for example, over the past two years, there would be no need whatever for any indexation allowance because there will have been no, or very little, inflation; or investments held for more than two years could be taken out of the charge to tax altogether.
I do not know how much money is yielded by capital gains tax—perhaps we may be told—or whether it would cost very much to apply a two-year time limit. But I do know that the present system produces a very great deal of wholly unproductive work for tax experts which adds nothing whatever to the prosperity of this country.
Therefore, I would like to hear an assurance from the Government that they will at least have a look at capital gains tax to see whether it might be given a slightly more user-friendly face.
§ 4.26 p.m.
§ Lord Rees
My Lords, first of all may I express my gratitude to my noble and learned friend Lord Howe of Aberavon for enabling us to debate this important subject. I offer my apologies that, due to a long-standing prior engagement, I may not be able to stay until the end of the debate.
In common with my noble and learned friend, I express suitable contrition, I hope, because, as the table to the Revenue's paper shows, I cannot pretend that during the period that he and I laboured at the Treasury, along with my noble friend Lord Cockfield, who I hope is going to enlighten us further on this particular subject, tax legislation became less voluminous, less complex or more user-friendly. We did our best in a modest way, but the time and the pressure of events perhaps disabled us from doing as much as we would have liked.
It must be common ground between both sides of the Chamber that the system is absurdly complex, absurdly voluminous, difficult to understand and expensive to administer, both for the taxpayer and, indeed, for the Government. However, I do not believe the problem to be just a question of more skilful draftsmanship.
We all know the charming aspiration of Oliver Cromwell to simplify and reduce legislation to one small book. I believe that merely shows that, while a very capable soldier and a very capable administrator, he had 1726 not a very great deal of experience of legislation and, of course, the world in his time was slightly simpler than it is now.
I am full of admiration for the part of the paper which, under the presidency of my noble and learned friend, the Institute for Fiscal Studies has produced for us to work on and which I have read with great profit. It has attempted to re-draft roll-over relief and post-cessation expenditure relief. Certainly, even I can see that it is expressed in words of greater clarity and greater elegance, but I am not really capable of judging how successful it may have been. Perhaps some noble and learned Lords will be able to enlighten us on that with their keen judicial minds and greater experience of construing such measures.
The point I want to make is that clarity is certainly one objective, but, as my noble and learned friend conceded in his opening remarks, certainty is another. I do not know whether such attempts to redraft in elegant and clear language will actually stand the test of close scrutiny by the courts and the keen eyes of accountants and members of the legal profession. I suspect that it will be found to be bristling with difficulties in the actual application.
I now turn to how the legislation might be improved. There is, of course, a keen debate, which again my noble and learned friend has touched on, as to whether it is possible to confine legislation, or primary legislation, to the statement of general principles, leaving the application to the good sense of the courts. This, of course, is the historic basis on which the corpus of fiscal legislation was built up. The doctrine of judicial precedent has enabled all sorts of amendments, amplifications and enlargements to be grafted on. I entirely accept what the noble Lord, Lord Taverne, has said, that perhaps it is a rickety and rather complex structure. That is not entirely due to the doctrine of judicial precedent but because of additions over the years. Like so many British institutions it is developing, but in this case it has not developed into something simpler, but has taken a rather more complex direction. The objection to the statement of principle approach to draftsmanship is that it does not enable the taxpayer to know with certainty what his position may be against any new piece of legislation that is introduced. My only answer to that is that it is questionable how far the taxpayer or his advisers are any more certain nowadays when legislation runs to an infinite number of clauses and an infinite number of pages.
Against that background, I hope that I played some modest role in stimulating the helpful innovation—this has been an innovation over the past decade or so—of the publication of explanatory memoranda. They are certainly a guide to comprehension of the basic thrust of the legislation. However, I am not certain how far they really assist, when it comes to litigation, to the construction of fiscal Acts before the courts. Equally, I applaud the greater use—I believe the courts are moving much more towards this—of permitting travaux préparatoires on the Continental basis. That is an increasing tendency which I applaud.
1727 I turn now to the process of legislation itself. Again I believe that my noble and learned friend, and I to a lesser degree, can claim some credit for the increased introduction of Green Papers and draft clauses produced in advance of the finance legislation itself. This may have made a significant contribution to informed debate. As I have said, I think that the current administration can claim some credit for that.
As regards the legislative process itself, one of the important factors is that there should be an opportunity for a slower, more leisurely, and more considered review of the legislation after it has been published. It should be considered in a less adversarial and less highly charged forum. I have spent too much of my life in another place in the pitched battles over finance Bills that have dragged on through the afternoons and nights of the summer months.
I wonder whether it would not be possible after a finance Bill has been published, and after the Second Reading has taken place in another place, that it should be consigned to a Select Committee with liberty to call evidence. Of course it is objected that this would be a time consuming procedure, but now that the Budget is introduced in an earlier part of the parliamentary year and has become an autumnal rather than a spring rite, I hope that time might be available for that approach. Obviously I am not suggesting that the underlying policy should be subject to such scrutiny but at least the detail of fiscal legislation would be given a more detailed and a more leisurely scrutiny. I certainly warm to the suggestion which my noble and learned friend made that such a Select Committee might even be a Select Committee of both Houses. There is a precedent although it may not be an exact one. I think of the Consolidation Committee on which I sat many years ago, and which was composed of Members from both Houses. I hope that that suggestion may be given a little more consideration.
In the same vein, I wonder whether governments could learn to exercise a slightly greater self-restraint in their fiscal legislation. Is there any need for the annual legislative orgy which finance Bills have become? I am not saying that this is a fault confined to any one party. Of course rates may need to be fixed annually, but I wonder whether the more technical aspects—I know all the difficulties of distinguishing between what I call the more political and the more technical aspects of finance Bills, but it is possible in many cases to draw that distinction—could be confined to technical finance Bills or even to secondary legislation, provided that it is susceptible of amendment.
I now turn to the background to fiscal legislation because I believe it is impossible to divorce the complexity and the mild absurdity of the present fiscal structure. It derives from the complexity of modern life both in the private and the commercial spheres. There is also the international context. Taxation, although naturally the responsibility and concern of domestic legislatures, impinges on transactions that straddle many frontiers. There is the need to reconcile measures, for example, of dividend taxation, with similar measures overseas, the need to consider double taxation, and all those other aspects of our tax structures. Then, again, 1728 there is the use of taxation for purposes of social engineering. Here I know that I touch on perhaps controversial political matters. When one has confiscatory rates of direct taxation of 83 and 98 per cent., which we endured up to 1979, it is inevitable that the tolerance of taxpayers and the whole approach of the tax paying world to the fiscal system will be different. The period between 1945 and 1979, with short periods of intermission, resulted, I believe, in a dramatic increase in the complexity and the weight of taxation and, as I say, reduced the tolerance of ordinary taxpayers.
I shall not today in the time available touch on the question of tax avoidance. I notice that the Institute for Fiscal Studies has for the moment put that aside, but there is a case for considering whether a simpler, fairer, lower rate tax system—I shall mention a precedent for that—might lead to a different relationship between the taxpayer and the Revenue. However, it will take time to reverse attitudes. I am well aware that even after the fairly impressive reductions in direct taxation which have been put through in this country, there will still be a tendency to tax avoidance. I turn now to the overseas examples. There is a helpful—
§ Lord Rees
My Lords, this Administration over a period of time has reduced taxation. It has abolished a number of taxes. I hope therefore that Mr. Blair's latest statement shows that there is some common ground between us. I hope that we may profit from the example of New Zealand and I hope that a low tax, simple environment may lead to genuinely user-friendly legislation. I hope that that is not too optimistic a note on which to end my overlong speech.
§ 4.37 p.m.
§ Lord Simon of Glaisdale
My Lords, we are singularly fortunate that a Chancellor of the Exchequer of such distinguished service as the noble and learned Lord, Lord Howe, should focus our minds on this aspect of our fiscal system. We are also greatly indebted to the three reports to which he referred. Particularly, it was most encouraging to read the two models on which we might base a complete rewriting of our fiscal code over the next five years. I mention the three reports at the risk of impertinence after the contribution, referred to by the noble Lord, Lord Taverne, of the Institute for Fiscal Studies. It has been consistently useful, not least in its latest report.
There are two different types of legislation. One is designed for ordinary people. An example of that would be the recent Family Law Bill which has been before your Lordships. Whatever one may say about its thrust, it is well drafted and can be understood by the people it affects—the ordinary people in the streets. Then there is technical legislation, for which one can reasonably be required to have recourse to an expert. For patents, one goes to a patent agent; for landlords and tenants legislation, to a solicitor, and for the revenue statutes to a solicitor or accountant. However, there is no excuse for the complication and obscurity of much of our fiscal 1729 code. An accountant ought at least to be able to understand the provisions of a Bill at First Reading, yet there is no question but that he cannot do so at the moment. The legislation needs to be reconsidered and rewritten.
I shall not attempt to cover points made by noble Lords who preceded me. Many of them have had far more recent experience of Treasury and fiscal matters than I and I shall not be affronted if the Minister tells me that I am discussing a Jurassic fiscal code. I venture to agree with practically everything that has been said but I wish to submit three broader considerations for your Lordships, for what they are worth.
First, we use our fiscal code for economic engineering. That is permissible, but it almost inevitably leads to great complication because it needs fine tuning. Frequently, what is required to be done by the fiscal code could be done in other ways; for example, capital allowances by direct grant. One would have to interpolate some body like the University Grants Committee or the Arts Council to make the necessary adjustments. We are used to such machinery and I suggest that whenever the fiscal code is used to implement an economic policy or even to guide personal behaviour, one should find out whether there is a simpler method of achieving the same result.
The second consideration which I wish to point out is how profoundly I agree with what the noble and learned Lord, Lord Howe, said about the haste with which much of our fiscal legislation is prepared. It is almost always due to an excessive desire for secrecy. When I was a Treasury Minister, no one outside the Treasury was allowed to see a Finance Bill until it had been published. That was relaxed painfully, and the Law Officers were finally allowed to see it. The secrecy was unnecessary. Some things are highly secret, like Customs and Excise legislation, where a change in duty may lead to reticulation. But income tax and other matters concerning the Inland Revenue are not so secret and could well be widely discussed, particularly with a view to ensuring perspicuousness.
The third consideration which I suggest is that one-fifth of our fiscal legislation relates to anti-avoidance provisions. They are incredibly complicated. The reason is that the tax avoidance schemes are often complicated. With our tradition of fiscal equity, the Inland Revenue follows the convolutions through so as to hit precisely one scheme and no other. By that time, the provision is often quite incomprehensible.
I once had such a provision, and an accountant on the Back Benches pointed out that in certain remote circumstances, it would involve a double charge to tax. That was a challenge to the Inland Revenue, which proceeded to chase it further to ensure that there was no double charge to tax. It succeeded, but at the cost of complete incomprehensibility. When I was challenged as to its meaning, all I could do was to repeat what Sir John Simon, with his incomparably clear legal brain, said: "What the Inland Revenue intends to do by this is so-and-so. I don't see how it does it, but that is the way 1730 they tell me they will administer it. I hope you will allow it to pass on that basis". They did allow it and allowed me to pass it on that basis too.
We can sweep away the great bulk of the anti-avoidance provisions by a simple provision such as exists in the United States and Australia. Any transaction, the dominant purpose of which is the avoidance of tax, shall be void for that purpose, though valid for any other. The law is quite capable of dealing with a dominant purpose. I ask that the point be considered.
§ 4.48 p.m.
§ Lord Cockfield
My Lords, the issues raised by my noble and learned friend Lord Howe and the report of the Tax Law Review Committee are of great importance. However, I wish to go further into the causes of the trouble than that report or my noble and learned friend's speech went. The report deals essentially with the effects and not with the causes. It deals with symptoms, not the disease itself. Although there is a great deal of merit in the relief of symptoms, there is much greater virtue in trying to tackle the causes.
My noble and learned friend kindly referred to the speech that I made in your Lordships' House nearly two years ago. On that rare occasion noble Lords were permitted by the usual channels to discuss the Finance Bill, and I analysed the reasons for the complexity of fiscal legislation. I do not propose going over the whole of that field again. But I want to make one comment which links back to those remarks.
The guilty parties, if I may use such a phrase, in this field are successive Chancellors of the Exchequer and also the legal profession, particularly the judiciary. I shall come to the latter point in more detail in a moment. So far as Chancellors of the Exchequer are concerned, it is not simply a question of failure to simplify taxes; it is a penchant they have for introducing new complications. Almost every Budget has its list of what that very great Financial Secretary to the Treasury, Lord Lever of Manchester, described as "ripping little wheezes". Those are what in these days are called "tax shelters" designed to attract public attention and, no doubt, the plaudits of the business community and particularly of the financial services industry, in whose pockets for some strange reason the benefits of the tax relief almost always end up.
We should be much better if we had much lower rates of tax—I entirely agree with my noble friend Lord Rees—but no tax shelters. The two things go together. If there are a lot of tax shelters, there are high tax rates. What we want are no tax shelters and much lower tax rates.
I now turn to the question of the legal profession and the judiciary. One has to be very, very careful what one says here. As we know, the judges are a very sensitive lot, much given to criticising one another (if one studies the minor incident of the Scott Report) but somewhat adverse to people criticising them.
It is very well known that the standard of proof in criminal cases is very much higher than the standard of proof required in civil cases. That is not so much a 1731 matter of statute law as of judicial decision over a long period of time. Equally it is the case—I agree that they are not entirely ad idem—that the judiciary applies very, very stringent tests indeed to the interpretation of fiscal legislation. Indeed, in one of the leading cases on which I was brought up, the judgment of the learned judge concerned could well be regarded as incitement to tax avoidance. It is not surprising, if that is the attitude on the part of the judiciary, that there is then the growth of a prosperous tax avoidance industry. The effect of that is that the Inland Revenue in turn sets out to pre-empt what it thinks will be the activities of the tax avoidance industry, and then if it finds it has failed it comes along with even more complicated legislation. Somehow we have to break through that vicious circle. I shall be absolutely frank: I do not know how that is done.
I listened with great interest to the remarks of the noble and learned Lord, Lord Simon of Glaisdale. One of my earliest jobs when was very young was cleaning up the excess profits duty of the 1914–18 war. That contained an anti-avoidance provision; so, indeed, did the excess profits tax of the 1939–45 war; so did the excess profits tax of the Korean War. I was involved in the administration of all three. I hate to say how old I am, but noble Lords can draw their own conclusions from my remarks. There can be provisions of that kind in times of war. First, people are prepared to tolerate them, and secondly, on the whole the standard of behaviour on the part of the kind of people who normally go in for tax avoidance is inhibited by public opinion. Incidentally, in both of the first two instances we had exactly the same sort of body as the noble and learned Lord suggested. I believe it was called the Board of Referees, which pontificated on whether or not the main purpose of the transaction was tax avoidance. A few years ago, in the Ramsay case, it looked as though the judiciary was taking a rather stronger line on purely artificial transactions, but I believe that has gradually been chipped away at in subsequent cases.
In the end, the attitude of the judiciary in this respect is a reflection of public opinion as it existed a generation or so ago. It has been said, and the quotation will be familiar to noble and learned Lords, that the law lags behind public opinion and public opinion lags behind the truth. In the present instance the time lags are very considerable. I believe that the general attitude in the country towards taxation is somewhat different to what it was, for example, at the time of the Civil War. I refer of course to the Civil War in which Oliver Cromwell and Charles Stuart were involved. The origin of that civil war rested on taxation considerations. The whole emphasis after those events was to cut down the power of the Crown to tax the citizen.
There has been a change in this quite extensive period, and people accept that there is a legitimate place for taxation and that it is not simply a question of the Crown getting money out of the citizen for purposes of which the citizen would not approve. Of course some governments take too much money, and for purposes that not everyone will support. But, as a general proposition, I believe there is a greater acceptance today that the state has a greater role than it had before the war, and certainly a greater role than it had before 1914. 1732 That is inevitably reflected in the level of taxation. But it is also affected by public opinion on the question of tax avoidance.
At the end of the day, this issue is capable of resolution only if there is a state of public opinion under which it is unacceptable. In those circumstances, a general anti-avoidance provision may take us some way further forward. But in the end, that can happen only if there is a change in the ethos and outlook of people in the country, of the legislature itself and particularly, at the end of the day, of the judiciary, whose job it is to enforce the standards by which we all have to live.
§ 4.59 p.m.
§ Lord Boyd-Carpenter
My Lords, I have been taking part in financial debates in one House or the other since the year of grace 1951. I must say at once that, of all those debates over all those years, I have never heard one opened better than this one, introduced by my noble and learned friend Lord Howe of Aberavon. His speech was masterly, it gave a splendid set-off to the debate and it demonstrated a greater quality of understanding of the hideously complex issues with which we are concerned in these debates than any I have heard. The House has every reason to be greatly indebted to him.
I want to deal quickly with one or two particular aspects of the matter and first of all with the need for simpler and more friendly financial legislation. That is becoming more difficult because of the curious way in which the Inland Revenue appears to be handled.
For many years I dealt with Inland Revenue offices in the town of Rugby, where I was an administrator, and in London where I lived mostly, and in Hampshire with a tax office close to me. It now appears that it is the policy of the Inland Revenue to move their offices very largely away from what I might describe as "inhabited areas" and put a considerable distance between a great many taxpayers and their offices.
Perhaps I may quote from my own experience. When I was chairman of Rugby Portland Cement, I dealt with the tax office in Rugby. Later I and my wife dealt with tax offices which are located, believe it or not, at Walsall and Bootle. I do not know how many noble Lords are familiar with those no doubt distinguished areas, but they are a very long way from those who live in the south of England.
I wonder whether my noble friend the Minister will say whether there is a deliberate policy of moving tax offices into remote parts of the country, with the consequence that proper, immediate contact with the tax office is much more difficult. If the tax office is in the same town or area in which one lives or works, many small points of difficulty can be easily resolved by a visit to the office and having a word with an official. But if the tax office is located, as in my case, hundreds of miles away, every issue, small or great, that one wants to take up with that office has to be dealt with either by prolonged and expensive telephone calls or by extended correspondence.
I wonder whether it is pure chance that I have been affected or whether it is the deliberate policy of the Revenue to move its offices out of the south of England 1733 in particular and install them in areas which are, no doubt, significant in themselves but are a considerable distance from where quite a large proportion of the population lives. It is important to get that point clear.
I turn to particular forms of taxation. I agree wholly with what was said earlier today; namely, that the best system of taxation is taxation at low rates with very few concessions. Once taxation is at a high rate and, to prevent causing hardship, it becomes necessary to allow a great many concessions, the whole system becomes infinitely more complicated. Can my noble friend the Minister say whether it is the policy of the Government to impose rates of taxation which are as low as possible, even though that may involve it being levied over a fairly wide area?
Here, I should like to comment on a tax which I believe is a thoroughly bad one; namely, VAT. VAT involves imposing an additional charge on a vast number of goods. In truth, it is inflationary because it inflates prices arbitrarily. It also operates in surprising areas. Some noble Lords may recall that a little time ago I raised in your Lordships' House the extraordinary business of VAT being imposed on repairs to old churches. If ever there is an area which would seem to be justifiably made free of tax, it must surely be work on old churches. When a small country parish, such as the one with which I am associated, has to repair its lovely but ancient little church and finds that, in addition to the building costs involved, it is also taxed on the money used for that purpose and the expense incurred, that seems to justify criticism of the tax system. I believe that VAT is a very bad tax. Its effects on the economy are very serious indeed.
It has been said earlier in the debate that the more there is a tax burden in one direction or another, the greater is the incentive to take steps to avoid it. Tax avoidance is a very serious matter. I know from my own experience at the Treasury that a great deal of energy has to be devoted to making sure that taxes are not avoided. But, the higher the rate of tax—whether it be VAT, income tax, surtax or whatever—the greater the incentive for taxpayers to avoid it and not, in that respect at any rate, to be taxpayers at all. Therefore, again I want to know the Government's policy in that direction.
Finally, if taxation is to be restrained, it is necessary that there should be economy in public administration. There are innumerable directions in which we all want to spend public money and know that spending public money will do good. But if we comply with those demands, we shall push tax rates up to dangerous heights.
In that context, in the moment that remains to me, I beg my noble friend the Minister to say that legal aid will be cut. In the past day or two there has been the example of a German who has undertaken litigation with a company in this country and who apparently has received£½ million in legal aid. As a taxpayer, I object to contributing to that amount of legal aid and in particular to assisting the efforts of a German to litigate against a British company.
§ 5.8 p.m.
§ Lord Ashburton
My Lords, not for the first time I find myself speaking in a debate in which, compared at any rate with the galaxy—if that is the appropriate collective noun—of former Treasury Ministers who make up such a large proportion of the speakers on this occasion, I am definitely a lay person, perhaps a lay Lord, albeit one with several decades of working experience of the two particular aspects of this matter that I want to raise. Since there are only two aspects, I hope to be brief. Given the fact that each speaker has 10 minutes, I may even under-run rather than over-run the time. I hope that one day it might even be possible to auction one's under-run to one of your Lordships who wishes to be more loquacious than he is allowed.
I cannot pretend that I have fully absorbed the detail of the Inland Revenue and IFS reports. But I have no difficulty in applauding their general tone and particularly the optimism about improvement which comes through in the report of the Inland Revenue. Some of the comparative examples of rewritten New Zealand and Australian tax legislation strike one forcefully as examples of what should be aimed at whenever possible.
In the course of my browsing I found one—perhaps other noble Lords also found it—rather pleasing double entendre. In paragraph 6.8 on page 22 of the Inland Revenue background paper, which is concerned with understandability of legislation, it says,Many critics have argued that it is not easy for users to find their way around our present tax legislation".Generally, it seems to me that rational people have to approve of simplification and thereby user-friendliness in every legitimate human activity. In the case of taxation there seem to me to be two principal reasons. First, a democratic one: it must be right that taxpayers as a whole accept the system of taxation as fair and rational. They cannot possibly do that wholeheartedly unless they have a reasonable understanding of it and indeed may well not accept it even if they do understand it.
There is a horrible jargon word in management speak—to "own". The various layers of management have to "own" corporate policy before they can effectively manage; taxpayers have to "own" the tax system before they will pay taxes happily and not spend excessive time trying to avoid payment. If your Lordships will forgive me, perhaps I can recount my daughter's experience. At the age of about 18, between school and university—I hope she is out of the tax net; this is around 20 years ago—she took a job at the Ideal Homes Exhibition. She came home waving around £45 in her hand and I said, rather facetiously, "I hope you are going to put aside some money to pay the tax on that". She turned round and said to me, "Daddy, what do you think you are talking about? I earned this!"
The second reason why simplification is desirable is that it should at least make some dent in the size of what is, in my view, an unnecessary industry. Fiscal advice employs an amazing number of highly paid professionals whose time could be redeployed. Given 1735 the present tax system, they could not be described as unproductive, but in any national calculation their time could be better otherwise employed.
I am well aware that it is not difficult to parade desirable simplifications without taking adequate account either of the knock-on effects or the need to replace the revenue which simplifications tend always to reduce. I doubt whether the noble Lord, Lord Cockfield, will remember, but he taught me a lot about how easy it was to ignore this side of changes when I discussed with him some ideas I had on the tax system in the late 1960s. I have always been grateful to him for opening my eyes.
The two aspects I should like to raise relate to CGT. Like the noble and learned Lord, Lord Brightman, I hope that this comes within the scope of the debate. In my view, CGT is not a satisfactory tax as it is now. However, it is too big a subject to embark on at this time except in one or two details.
CGT, at the taxpayer's marginal rate of up to 40 per cent. at the top, is a tax which can badly distort personal investment decisions. As a simple example—I know that one must be wary of simple examples—an individual buys a holding of shares for £1,000 and happily finds that, to his surprise, the price has quickly risen further than he feels is justified by the facts available to him to, let us say, £2,000. He would like to sell but that would involve him in paying somewhere between 25 and 40 per cent. of the gain in tax, leaving him with somewhere between £1,600 and £1,750 to reinvest.
Anyone who has tried to run investment portfolios for others, professionally or for himself, is aware that to find an alternative investment which will do as well from a base of £1,600 as the former will from £2,000, is something of which one dreams. To act on that belief takes a lot of confidence. There must be hundreds of thousands, possibly even more, of investment holdings which should rationally be switched but where the tax cost is such a heavy disincentive that they are left untouched.
I know that individuals can and, under the present tax regime probably should, invest through CGT-exempt vehicles such as investment or unit trusts. But the very existence of such vehicles seems to me to be clear evidence that CGT at present rates is too high and that switching investments should not be a taxable event as such. If there is one way of deterring individuals from bothering to understand and appreciate the workings of commercial undertakings, I can think of no better way than giving an incentive such as now exists to put all such decisions in the hands of a relatively small number of professional managers. I may be wrong, but I suspect that the raising of the base rate of CGT to 40 per cent. from the 30 per cent. rate then charged—already a heavy deterrent to switching—was probably intended as a simplification. In my view it remains as an awful warning of unintended disadvantageous side effects.
Simplification is bound to involve compromise. But I add my plea to that of the noble Lord, Lord Cockfield, and others that the best simplification that could possibly be introduced would be to lower drastically the rates at which taxes are levied and to reduce equally drastically the exceptions. In the specific case of CGT that would save an enormous amount of time and money.
1736 I know that there are problems galore in all of this and the question of how to tax those whose income is made by effectively trading in shares is one of the more obvious. If we can agree that income should legitimately be taxed, however it arises, but that switching of investments should be a legitimate non-taxable event as it is for investment and unit trusts, then the compromise should lead one to a low rate of tax without exceptions. Certainly any system which attempted to determine annually what proportion of an individual's investment profits had been spent rather than reinvested would be a nightmarish step directly away from simplification.
The second point on which I should like to touch briefly—I seem to be overrunning my time already—is the current resurrection of the argument that capital gains tax should be paid at a lower rate according to the length of time an investment has been held. That would undoubtedly be something of a simplification in that it would help to allow the abolition of index linking, though one must remark that the best way of abolishing index linking is by abolishing inflation. I hesitate to criticise any move which tends to lower tax rates. But long experience has taught me that the correlation between the time an investment has been held and the social worthiness of that investment is tenuous in the extreme. I was going to say "tends towards zero" when I realised that that would not stand up.
I know that the received wisdom is that long term is good and short term is bad; that speculation is undesirable and can be logically separated—I know not how—from investment which is desirable. But those views do not stand up to dispassionate examination. All investment involves speculative analysis of prospects and, in our heart of hearts, surely, we know that. The desirable thing, it seems to me, is that investment decisions should be well informed and rationally arrived at, not that they should be judged with the criterion of how long they are held.
Occasionally, a short-term sale of an investment is the right thing to do. The price of a share can run up against all expectation to a level where the only proper response is to sell it. By so doing the investor is actually doing good, by tending to reduce unrealistic pricing in the market and helping, in however small a way, to make the market more rational. The investor does not deserve to be criticised therefore nor taxed more heavily.
As I said, a graduated CGT may well be a simplification and better than nothing. But I fear that some people kid themselves and would happily kid the public at large that there is some moral merit in holding investments for a long time. Though it is not relevant to the present debate, I am equally unhappy that the word "stakeholder" is in danger of being used in the same way as "long term". They sound good, but do not necessarily stand up to dispassionate analysis. Roll on simplification; but caveat simplificator.
§ 5.19 p.m.
§ Lord Hayhoe
My Lords, having served as one of his Ministers of State in the Treasury when my noble and learned friend Lord Howe of Aberavon was Chancellor, I am delighted to support him again today. Our debate 1737 is about simpler and more user-friendly tax legislation, and rightly we concentrate today on tax. But the general principles have much wider application. Indeed, my noble and learned friend referred not only to the report of the Institute of Fiscal Studies but to the Hansard Society Commission chaired by my noble friend Lord Rippon of Hexham, in which I had some hand because in those days I was chairman of the Hansard Society and persuaded him to serve. There was also the seminal report from the committee of my noble friend Lord Renton in 1975 and before that the Heap Report in 1970. So there has been a long run of these reports. The Hansard Society Commission report stated:The Heap Report was followed by other critical studies. In 1972 the Stow Hill Committee … recommended solutions to the problems outlined in the Heap Report. In 1973, following further comments by a Procedure Committee of the House of Commons, the Renton Committee was appointed by the Lord President of the Council 'to review the form in which Public Bills are drafted'; it reported in 1975, making 81 detailed and technical recommendations for change. The sorry fact is that despite these critical but constructive reports almost nothing has been done to improve the situation".Some improvements had been made. The revenue departments had consulted more widely, as my noble and learned friend Lord Howe said. The draft clauses of significant parts of tax legislation had been published during the early 1980s, as described by my noble friend Lord Rees. But the major reform for which all of us have been waiting so long has at long last been given real impetus and prominence in the Inland Revenue's plans for tax simplification which were published last December. I am delighted to give a warm welcome to those proposals.
As is made clear in those reports, there is scope for simplifying the language of the law. The examples given in the report of the Institute of Fiscal Studies and in the appendices to the Inland Revenue report are striking. How could anyone not want to see this kind of change being made? There is also scope for improving and simplifying the policy content of tax legislation. I shall not repeat many of the comments that have been made except to note that recently in the United States the fashionable thing was Mr. Forbes and his flat tax, which was designed to do away with many of the complexities. It seems to have had a fairly limited life and has gone into the ground, though it may be resurrected for the Republican platform for this year's presidential election.
I am delighted that the Inland Revenue report makes it clear that both aspects are now to be addressed. One recognises that much of the complexity of the law arises from the pursuit of fairness, and the elimination of present complexities will almost certainly give rise to greater inequalities and inequities in the way taxes fall. A proper balance has to be struck and no doubt this will be extremely difficult to achieve. The Inland Revenue's plans and proposals deserve every encouragement. They are in tune with the plans for self-assessment. If one thinks just of self-assessment of capital gains and what we have heard of today, simplification on that front will be helpful for those people who are making gains of more than £6,000 a year, because under that figure a blanket opt-out or relief is available under existing provisions. I hope that real progress will be made on 1738 the re-writing programme set out in the Inland Revenue report—re-writing over about five years most of the primary legislation on Inland Revenue taxes in simpler and more user-friendly language which will be easier for everyone to understand. What a delightful and welcome prospect that is.
I want to say a few words about explanatory memoranda. The Institute of Fiscal Studies and the Hansard Society Commission argued for a much greater use of explanatory memoranda. The Inland Revenue report concludes rather more cautiously, but certainly not discouragingly, that progress could be made on that front. I agree that there would be implications for other areas of UK legislation. One has only to look at some of the complexities concerning local government finance or our social services to realise that explanatory memoranda would have a part to play.
I should like to see a much wider use of explanatory memoranda. I agree with the noble Lord, Lord Taverne, that it is more sensible for reference to be made at a later stage to explanatory memoranda than to what appears in Hansard. I remember only too well my first intervention as a new Minister at the Treasury on the Finance Bill in the very early hours of the morning on a subject about which I knew absolutely nothing but on which I had a marvellously thick book of briefing from the Inland Revenue. I appropriately read out the response to some detailed points that had been made by one of the Opposition spokesmen who stood up afterwards to say how well I had dealt with the point he had raised and welcomed my first intervention in Finance Bill Committees. However, I discovered from my private office afterwards that I had read out the wrong reply to the amendment. Clearly, it made not the slightest bit of difference but it underlines the point that with some of the very complex provisions of Finance Bills very few of those speaking on them really understand the detail. I therefore welcome very much what is being proposed.
I was disappointed by the Government's response to our debate on "the legislative process" which was initiated by the noble Lord, Lord Nathan, in December 1994. I am now greatly encouraged by the Inland Revenue's plan, The Path to Tax Simplification. I wish it well.
Finally, I endorse and commend two of the final points made by my noble and learned friend Lord Howe of Aberavon. He spoke of using the Special Standing Committee procedure on matters of tax legislation and also of the possible future role of this House perhaps in a joint committee of that kind. I think that such a combination, together with the efforts that are now to be made by the Inland Revenue with the support of the Government and the Chancellor, could lead to a considerable advance in the simplification of our tax legislation. It is something surely that in all parts of the House we would warmly welcome.
§ 5.29 p.m.
§ Lord Shaw of Northstead
My Lords, I thank my noble and learned friend for initiating this debate today, a debate which is a valuable start to what must be a fairly long process. I was interested to hear my noble 1739 friend Lord Hayhoe admit that in his first appearance on a Finance Bill Committee he read the wrong brief at a very late hour. As I suspect that I was probably chairman of that committee I hope that I was not guilty of allowing him to talk out of order. Be that as it may, it shows the need for simplification so that even Ministers may have a chance to understand what they are saying.
The Path to Tax Simplification discloses the quite horrifying figures of increases in the total amount of tax law in the 18 years between 1952 and 1970. What was, in 1952, 1,076 pages, in the next 18 years became 3,119 pages: in the past seven years it has become 3,483 pages.
We must all welcome the initiative taken by the Chancellor of the Exchequer to try to simplify the tax legislation for the benefit of businesses and taxpayers generally. Reform is not going to be easy, as I believe nearly every speaker this afternoon has said. It certainly will not be quick. It is forecast that a complete rewrite will take around five years. I am not surprised, but this massive task is only worth undertaking if it is to be done thoroughly and with full consultation.
The Inland Revenue has, most welcomely, already made a start in its document The Path to Tax Simplification, which happily concludes—to fortify the thoughts of most of us this afternoon—that it is satisfied that a rewrite is technically feasible and that its benefits will substantially outweigh the cost—a note of optimism not usually shown by the Inland Revenue.
Today we are not, of course, discussing taxation policy, but rather the language and form in which taxation law is written and presented. As the Tax Law Review Committee tells us on page 5 of its report,Frequently, you cannot see even the broad outline of the picture without solving the puzzle. To this extent the legislation is written in an impenetrable style with no way in … But sometimes the puzzle is insoluble and the legislation is then incomprehensible".The difficulties in understanding tax legislation arise partly in its wording and layout and partly also in the pattern of its intent, for every aspect of a subject is sought to be covered. It has not been good enough, and nor will it ever be in my view, to lay down the law simply as a general principle or intention. The detail has had to be spelt out. Consequently, as Bennion is quoted as arguing in the TLRC report,in the UK we prefer to be ruled by a democratic legislature which passes Acts after full, public debate and which weighs and argues over almost every word in almost every Act".Frankly, too often, this is simply not true. I have served on a number of Finance Bill Committees both as a Back-Bencher and as chairman. Too often, the more complicated the clauses, the less difficulty the Government have had in getting them through. I say immediately that I make one notable exception. When I first became an MP in 1960, the noble and learned Lord, Lord Simon of Glaisdale—I hope that I may say "my noble and learned friend" because he was a constituent of mine for a number of years—played a leading part in the preparation of the 1960 Act. That Bill contained some very complicated clauses on anti-avoidance. I have looked them up. They were widely debated, but clarity was not an obvious result. 1740 I do not in any way blame my noble and learned friend for that. The Treasury had clearly looked at them and put the brief firmly on his knees so that he would have to deal with them.
Anti-avoidance is a matter which has not been looked at yet, as we have been told, but in fact it will be looked at as something entirely separate. I am sure that that is right. It is a field where specialists in the Inland Revenue battle with taxation specialists in the private sector. Sometimes a lack of clarity results in uncertainty, and that in itself may, it is hoped, deter attempts at avoidance. But sometimes, as has been said this afternoon, a lack of clarity is the result of a lack of clear instructions to the legal draftsman. All that raises the question as to whether notes and explanations attached to legislation should be encouraged.
The modern custom of providing Notes on Clauses has been very successful. It has been helpful not only to committee members, but also to the poor old committee chairman who, in another place, has to have a good understanding of what is the subject of debate to keep the debate in order. I believe that such notes, or other notes made in some other way, along with ministerial comments made during the passage of Bills, should be available to the courts should litigation arise at a future date. I say that because those notes and the explanations given by Ministers must have been a part of the reasoning by which Parliament passed the legislation in the first place.
The TLRC report suggests that there should be a project team drawn from various disciplines. Chapter 7 states,The main function of the rewrite would be to improve the clarity, comprehensibility and accessibility of the legislation".I entirely agree with that, and I entirely agree that the resultant Bill would be a Finance Bill and therefore that it would not go before a Committee of your Lordships' House. Nonetheless, the report suggests that any such rewritten proposals should be referred to a specially created independent review body, which would report on the proposed legislation prior to its introduction into Parliament. Such a review body, it says, would be comprised of tax practitioners and hence represent a formalised consultation.
Whether the rewrite is done by a project team, as described by the TLRC, or by the Inland Revenue, I accept that outside consultations must take place and since the objective is not to raise money, butto improve the clarity, comprehensibility and accessibility of the legislation",we should seriously consider ourselves being involved at some stage in the consultation process. It must be borne in mind that the results of this rewrite are bound to have a significant effect on legislation far wider than financial legislation. Indeed, why are we having this debate today if we have not a proper and valid interest in what is being proposed? I believe that our interest should be maintained throughout the period of the rewrite and our views made available to the review body.
§ 5.37 p.m.
§ Baroness Seear
My Lords, as the noble and learned Lord, Lord Howe of Aberavon, mentioned in opening this debate, I am, very much to my surprise, a member of the Tax Law Review Committee. I sit on this committee in a state of considerable trepidation as I am surrounded by persons who are extremely experienced and expert in the field. They are judges, accountants of the highest calibre and legal advisers, and a very formidable body it is. However, it includes two or three chosen ignoramuses—I speak for myself; the others are not ignoramuses, of course—who have no such qualifications. I assume that we are there in order to look at what is being considered from a political point of view, because several of the members are MPs—and that is why I made the qualification that I did a moment ago. But we look at the issues even more from the point of view of what we would now have to call the person on the Clapham bus, because if there is any legislation which directly affects every citizen in the country it is tax legislation. It affects them in the most sensitive place, namely their pockets, and therefore it is important that the ordinary taxpayer's point of view should be considered when changes in the tax system are being discussed.
From the point of view of the taxpayer—even more importantly with the coming into force of self-assessment—the three matters that must govern all tax legislation and reviews of tax legislation are clarity, certainty and democratic control. Nobody can possibly disagree that the present legislation is almost impossible to understand. I am reinforced in that by the fact that the most eminent of the people who sit on this committee from time to time confess that they do not understand it and that it takes them an interminable time—which is wasted time—to find their way through the present legislation. There is no question but that it needs to be clarified.
One welcomes the decision to try to rewrite the tax legislation in plain English. Those of us who are concerned with trying to write plain English know that this is no easy task. To write about an extremely complicated matter in plain English and to make it accurate at the same time is very difficult. Five years is not too long for such an undertaking. As I listen to the discussions in the committee, it occurs to me from time to time that in the desire to achieve clarity, accuracy and therefore certainty may be sacrificed. Certainty is vitally important. Before people embark on any expenditure, or any activity, they want to know what the tax liability will be. They must be able to find out within the legislation how tax will impinge upon them.
While I very much welcome the determination to rewrite the legislation in plain English, I enter the caveat that there is a considerable risk that in so doing we may lose certainty, which is important from the point of view of every taxpayer in this country. There is a tendency in the discussions to believe that everything will be fine if one gets it more or less right. That description of the discussions is perhaps a little unkind, but I do not believe that that is good enough from the point of view of the taxpayer. It has to be exactly right. The overworked expression, "The devil is in the detail", 1742 applies pre-eminently to tax. One may well be caught out in a plan on which one embarks because of a detail of taxation that has not been entirely clear. Much as the rewriting of the legislation in plain English is to be welcomed, the need to get it absolutely accurate must not in any circumstances be sacrificed.
A suggestion has been made—which has been accepted only in modified form—that the legislation should be written in purposive terms and that the detail should be left to regulations. Here the parliamentarian in me is very much stirred. Noble Lords have often complained about the tendency in modern legislation to leave matters of importance to regulations. Your Lordships' House has been extremely vigorous in ensuring that that does not happen more than it absolutely must. But I suggest that in the field of taxation this practice may be particularly dangerous if regulations are not subject to detailed and rigorous scrutiny.
It has been suggested that a Special Standing Committee should be set up to go through the regulations and vet them and that they should come back to Parliament for final sanction. That democratic sanction is very important. We must be on our guard against making it simply a rubber stamp. It has already been suggested by the noble Lord, Lord Shaw, that that is too much the case at the present time. The reform will be very imperfect if that continues. After all, the basis of Parliament is that there is no taxation without representation. If our representatives do not have a real input into the scrutiny and an opportunity to object, however good the committee may be that has gone through it, we shall not achieve what we should achieve and the safeguards for the taxpayer will not be adequate.
§ 5.45 p.m.
§ Viscount Chandos
My Lords, I should like to join in thanking the noble and learned Lord, Lord Howe of Aberavon, for initiating this important and interesting debate. His role extends to the presidency of the Tax Law Review Committee, whose interim report has been the kernel of this afternoon's debate. Both in his speech and in his foreword to the interim report, the noble and learned Lord has demonstrated his knowledge of the subject, commitment to reform and his customary frankness in admitting lack of progress in this direction in all the years that he was (in the words of his noble friend Lord Cockfield) one of the guilty parties.
The noble and learned Lord might have said that he had wrestled for too long with the obstacles to the production of a comprehensible, efficient and modern framework for tax legislation. But on this side of the House, we might derive two conclusions from the admissions of the noble and learned Lord. First, over the past 17 years the Conservative Government have not slayed all of the dragons—not even the right ones—and may have shied away from the dragons with the longest tails and most toxic breath.
Secondly, in a more bipartisan spirit, the task of reforming both the existing body of tax legislation and the future legislative process is a formidable one. The noble and learned Lord's speech and recommendations 1743 are a positive and valuable contribution to building the momentum that has been absent in the past, alongside the Inland Revenue's uncharacteristically positive document and the excellent interim report of the Institute of Fiscal Studies, whose work over the past 20-odd years is something of which the noble Lord, Lord Taverne, can be justifiably proud—awake or asleep! The increased recognition on the Government's part of the deficiencies in the status quo, and the cautious start now being made to address this, are also welcome; but inevitably the burden of taking this forward will in large part fall, along with so much else, on the next government.
The importance of action to improve the clarity and consistency of tax legislation cannot be over-estimated. This has been recognised by my honourable friend the Shadow Chief Secretary, notably in his speech in May of last year. The interim report points out in Section 1.29 that the estimated burden of the present inefficiencies and inadequacies amounts to £10 billion, of which as much as £7 billion falls directly on the taxpayer as compliance costs. That is even higher than the £4 billion suggested by the noble and learned Lord, Lord Howe.
In terms of fairness and equity—a subject stressed by the noble Lord, Lord Taverne—the complexity and opaqueness of the present position unduly penalises the less well-off. Sophisticated professional advice of the kind needed to navigate through these murky waters inevitably is affordable by and hence available to, only the wealthier individuals and larger companies. Above all, the overwhelming complexity which arises from faults in the underlying policies, overlaid with the effect of excessively detailed drafting to create intended clarity, comprehensiveness and certainty, produces a system in which action taken on both a macro and a micro-economic basis can become so distorted that the intended effect can be blunted or negated, while setting off a whole series of after-shocks and knock-ons in unexpected areas.
Although the main thrust of today's debate and of the interim review—and even more so, that of the Inland Revenue's report—is in the area of language, and the form of tax legislation, it is, as other noble Lords, particularly the noble and learned Lord, Lord Brightman, and the noble Lord, Lord Cockfield, have argued, unavoidable that the substance of tax policy has to be considered at the same time.
The analysis in the interim report of the implications of operating under common law rather than the civil law which prevails elsewhere in much of Europe is, speaking as a very unlearned Lord, illuminating; the consequences of building, higgledy-piggledy, uneven brick by odd-shaped flint, on a 19th century structure, as highlighted by the noble Lord, Lord Taverne, are only too clearly demonstrated; but we must ask at the same time whether the fundamental tax policies of the past 17 years—or even of the past 150 years—have sought to emphasise simplicity and efficiency whenever possible?
Of course the world has become more complex, none more so in the areas of foreign exchange and financial instruments, wherein some of the most fiendishly 1744 difficult and incomprehensible tax legislation has been introduced in recent years. The proposed rewriting of existing legislation will in time reveal how much of that legislative complexity was necessary.
But what is already clear is that, despite the Government's regular pronouncements on removing special tax allowances and the like (the noble and learned Lord, Lord Howe, laid claim to that while he was Chancellor) we have been presented with a continuing stream of special schemes—"ripping little wheezes"—with the consequential increase in legislative complexity on the one hand, and economic distortions on the other: Business Start Up Schemes changed to Business Enterprise Schemes, which changed to Enterprise Investment Schemes, with hundreds of clauses of legislation over 15 years. The legislative effect has been burdensome and the economic effect—well, my Lords, the Exchequer has financed fine wine, classic cars, residential property, but precious few productive businesses, certainly in comparison to the tax revenue forgone.
These Benches therefore wholeheartedly support the noble Lord, Lord Cockfield, in his advocacy of lower taxes and no tax shelters, with the important condition that the lower taxation is fairly applied, not concentrated upon those who currently benefit from the tax shelters which abound.
I return to the narrower but vital issue of tax legislation and the related parliamentary procedure and scrutiny. We on these Benches also give our strong support to the key recommendations of the Tax Law Review Committee, in terms of plain language, the use of explanatory memoranda, and a rewrite of existing legislation, starting with that relating to the taxation of income.
Even if the Minister's own understanding of tax and other complex issues is such that Hansard's record of his contributions will be a model of clarity and usefulness, I most strongly support the general advocacy by the noble Lord, Lord Taverne, of explanatory memoranda, in preference to the deliberations of the Minister's less clear-headed colleagues.
On these Benches, we look forward to the accelerating progress of tax simplification—form and substance alike—under the strong direction of the Minister and his colleagues—and of their successors.
§ 5.54 p.m.
§ The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish)
My Lords, we have had a most interesting debate. I stand to sum it up with trepidation. It seems to me that I come at the end of what could be described as a stream of penitent Chancellors, Chief Secretaries, Financial Secretaries and Ministers of State at the Treasury attempting to explain why they did not do what they thought they ought to do when they held office. It has been a kind of mea culpa all afternoon. I felt at one stage that I should perhaps rush to the Bishops' Bench and absolve them all from their responsibilities for that.
There is appropriateness in the day chosen by my noble and learned friend Lord Howe of Aberavon, because the other place is this day dealing with the 1745 Report stage of the Finance Bill. Sometime within the next few weeks your Lordships will have an opportunity, I suspect, to have a Second Reading debate on the Finance Bill when it wends its way to us. I do not believe that I should be saying anything too controversial if I doubt whether it will be a good example of clarity when I come to explain to your Lordships some of the parts of the Finance Bill.
§ Lord Simon of Glaisdale
My Lords, will the Minister then ensure that it does not come on a Friday before a bank holiday this year?
§ Lord Mackay of Ardbrecknish
My Lords, I think that I can give the noble and learned Lord the assurance that it will not come on a bank holiday.
My noble and learned friend Lord Howe has given us the opportunity to discuss three documents which are really two reports: one from the Tax Law Review Committee and the other from the Inland Revenue. The proposal contained in both those documents, and agreed to by every Member of your Lordships' House who has spoken, is to rewrite primary tax legislation to make it clearer and more user friendly, which is an important and interesting suggestion, as has been demonstrated by today's debate.
In recent years the complexity of tax legislation and the criticism of that complexity have been growing. In part, it concerns the complexity of the underlying rules. There are a number of reasons for that. The tax system has to cope with an ever more complex modern world, while continuing, as the noble Baroness, Lady Seear, pointed out, to give certainty and equitable treatment to taxpayers.
There has also been criticism of the way those complicated rules are expressed. Many argue that the style involves complicated syntax, words with special legal meanings, long sentences and archaic or ambiguous language. Much tax legislation is also very difficult because it has been drafted to cover every conceivable situation.
From his position as one-time chairman of Finance Bill Committees, my noble friend Lord Shaw suggested that the more complicated a clause, the easier it was for the Government to get it through and that that may not have been entirely a good thing when it came to the proper scrutiny of legislation.
Against that background, a key event was the setting up in late 1994 of the Tax Law Review Committee, whose role my noble and learned friend Lord Howe has described. A number of your Lordships, including the noble Baroness, Lady Seear, are involved in it.
In parallel, the then Financial Secretary to the Treasury asked the Inland Revenue to look at the options for the simplification of tax legislation. That exercise was given added impetus by Section 160 of the Finance Act 1995, which required that a report be laid before Parliament by the end of the year. In the event, the two reports were published within a few weeks of each other: the TLRC's on 23rd November and the Revenue's on 12th December.
1746 There were many similarities in the conclusions reached by the report both as to the reasons for tax law being so complex and on the practical scope for simplifying it. My noble and learned friend Lord Howe has described the TLRC's work. I need not repeat what he has said, but I should like to say a little more about the Revenue's report. The Revenue's findings were set out in The Path to Tax Simplification and an accompanying background paper. The report was based upon extensive study and consultation.
The main conclusion is that all the primary tax legislation covering Inland Revenue taxes (almost 6,000 pages) should be rewritten to make it clearer and more user friendly. That proposal was announced by my right honourable friend the Chancellor of the Exchequer in his Budget Statement last November in another place. That announcement has been widely welcomed on all sides.
As my noble friend Lord Shaw said, this is a major project. It is also an all-or-nothing venture. It would create a nonsense to rewrite only a fraction of this legislation, leaving the rest of it untouched. To rewrite 6,000 pages of legislation will take about five years and involve some 40 highly skilled and professional staff. This is a measure of the priority which is being given to this project and of the Revenue's commitment and determination to do it and do it well. The noble Lord, Lord Taverne, welcomed that determination. My noble friend Lord Hayhoe described it as a delightful and welcome prospect. In so far as taxation is ever a delightful and welcome prospect, I am grateful to him for his remarks.
Perhaps I may say something about what the rewrite would involve. There is no single technique which, if applied across the board, would solve problems arising from the way tax law is currently structured and expressed. The Revenue is therefore examining a package of techniques which, used together, will produce simpler legislation.
The noble Baroness, Lady Seear, said that certainty was important. I am not entirely sure that the complicated way in which we have dealt with the matter over the years has brought certainty. Dare I suggest that, if it had done so, Finance Bills would not have had to revisit tax legislation in previous Finance Bills in order to make the position clearer, to close loopholes and to catch those not caught who were originally intended to be caught—
§ Baroness Seear
My Lords, when I asked for certainty in the rewrite I was not implying that there was already certainty; on the contrary.
§ Lord Mackay of Ardbrecknish
My Lords, I am glad to hear that. I had thought that the noble Baroness was doing so, but I am pleased to hear that she is with me and other speakers in this respect.
The first of these techniques we wish to look at is plain language; using simpler and clearer words and sentences to make tax legislation more accessible. The noble Lord, Lord Ashburton, put it well in saying that people should feel that they own the tax system and that 1747 they might accept it better if they understood it better. My noble friend Lord Rees indicated the need for clarity and certainty to help taxpayers to understand.
The Revenue is also looking at the overall structure of the tax code. A better structure and order, possibly accompanied by a new numbering system, could help to make the tax code easier to understand. Various signposting techniques might also be helpful such as explicit cross-referencing, clearer headings and so on. More radical suggestions, such as using flow charts, graphics and notes to the legislation, are also being assessed.
Changes could be made in the ways in which definitions are used so as to make it easier for users of tax legislation to identify them. My noble and learned friend Lord Howe drew to our attention the five-page submission he received when he suggested that the words to be defined might appear in italics. We believe that the defined terms could be printed in a different typeface. I notice that in the examples given in the report italics are used for all the words which are subsequently defined.
It will he necessary to examine carefully the legal effect of all of those techniques in order to ensure that they do not inadvertently cause uncertainty and inaccuracy. The look and style of legislation also affects the ease with which it can be used and is a matter for Parliament, not for the Revenue. However, I welcome the fact that thought is being put into that area, as do all noble Lords who have taken part in the debate. All those techniques may have a role to play in making tax legislation simpler and more user-friendly and the Revenue proposes that they should operate as a package. The Revenue is of course aware of the importance of a coherent structure to all this in order to ensure that old style and new style legislation do not co-exist in the same provisions.
The rewritten law would not of course be new law. Apart from some minor changes to simplify the tax regime, it would be the same law expressed in a clearer and more user-friendly way. Major policy reforms have always been a Budget matter and will remain so. The rewrite will not hinder reforms; indeed, by making existing law easier it will assist the policy reform process. The subject of the debate and the two reports is the reform of the way in which legislation is set out and reforming existing law. It is not about reforming certain aspects of policy underlying the tax law.
The noble and learned Lord, Lord Brightman, and the noble Lord, Lord Ashburton, drew attention to the difficulty that one has in understanding the capital gains tax legislation. The noble and learned Lord, Lord Brightman, read out explanations and the tax legislation and he made his point well because he lost me quite quickly. At the risk of bringing the noble and learned Lord, Lord Simon of Glaisdale, to his feet, perhaps I may say that I should have preferred the algebra which was attacked in a previous piece of legislation that I took through the House. Algebra might have been a good deal easier than the explanation which the noble and learned Lord read out.
1748 The noble Lord, Lord Ashburton, referred to the distortions which can be caused to those who have to make investment decisions by application of the capital gains tax laws. Those matters are not the subject of this debate and this particular issue, although if the law were written more clearly they would be easier to understand and to deal with or would be more clearly seen as requiring reform and change. Therefore, one must separate reforming the principles, the policy behind the tax law, and reforming the way in which legislation is expressed.
The noble and learned Lord, Lord Simon, and my noble friends Lord Hayhoe and Lord Cockfield spoke of the Government being secretive as they devise the Finance Bill. The Revenue's report deals with that point. The amount of consultation on the Finance Bill has increased significantly, as my noble friend Lord Hayhoe pointed out. The Revenue's report proposes that that should be built on by making even more legislation available in draft and by developing a code of practice on consultation to ensure that everyone involved is aware of best practice. That would be a major step forward as regards new legislation but not as regards the rewrite of existing legislation.
Many noble Lords, in particular the noble Viscount, Lord Chandos, mentioned explanatory memoranda and their usefulness in considering the purpose of the legislation. The Government are already publishing notes on clauses in order to give brief explanations of individual Finance Bill clauses and schedules. The Revenue's report proposes that they should be expanded to give more information on the Government's intentions and the impact of the measures.
The noble Lord, Lord Taverne, suggested that perhaps referring to reports in Hansard of what a Minister said is not the most reliable way of backing up what the Government mean. I understand the point because a few years ago I was horrified to discover that, as a result of the Pepper v. Hart decision, remarks made in 1985 during the Committee stage of a Bill were to be prayed in aid in court in defining what the Government meant. As that was a serious matter involving salmon poaching I was concerned that my definitions would hold water, or not hold fish, as the case may be. I am happy to say that my definitions stood up in court, but I was given pause for thought in realising that what I said perhaps off the cuff in Committee would be prayed in aid in a court some years later. I agree with the noble Lord, Lord Taverne, that it is preferable that explanatory memoranda are used in court cases rather than the words of the Minister at the Dispatch Box perhaps attempting to answer on the hoof clever and not so clever questions posed by the Opposition. Therefore, there is something to be said for explanatory memoranda and I do not believe that there is a great deal of difference between the reports of the Inland Revenue and the TLRC in that regard.
Another point was raised which overlapped policy and the reports' request for simplification of the legislation rather than the policy itself. It was made in particular by the noble and learned Lord, Lord Simon of Glaisdale, and my noble friend Lord Cockfield. It was the issue of tax avoidance. I believe that the noble and 1749 learned Lord stated that one-sixth of legislation deals with avoidance and that it can be most complicated. I understood him to suggest that we should not have so much legislation and that it should be left to the courts to judge against the simple principle that any transaction whose dominant purpose is for tax evasion is illegal if it is used for that purpose. I hope that I have understood him correctly. I shall certainly draw that to the attention of my right honourable and honourable friends at the Treasury who have responsibility for those matters. It may be on the same basis that the noble Viscount, Lord Chandos—
§ Lord Simon of Glaisdale
My Lords, since the noble Lord quoted me, perhaps I may just put that right. I said that it was void for that purpose but valid for all others. It would not be illegal.
§ Lord Mackay of Ardbrecknish
My Lords, I should not draw my words to the attention of my friends in the Treasury but rather the Hansard quote, which will be exact. I am sure that the noble and learned Lord is right that that is what he said. I managed to note down just a small part of it.
The noble Viscount, Lord Chandos, took up the point made by my noble friend Lord Cockfield about "ripping wheezes". I was rather worried that the noble Viscount thought that the phrase referred only to some of the business undertaken by my noble and learned friend Lord Howe. The originator of the phrase was the late Lord Lever who suggested to the 1974–79 Labour Government a number of "ripping wheezes" to get round some of the serious financial problems that they had. I read about that with pleasure during the Christmas Recess in an autobiography coming from a member of the government of that time. But I believe that we all agree that we should not base our tax legislation on how many "ripping wheezes" we can find. We should base it much more soundly than that. I am sure that the noble Viscount and I agree about that entirely.
Before I leave the policy principles, perhaps I may refer to an issue raised a number of times by my noble friend Lord Boyd-Carpenter. He seems to object to parts of the Civil Service being dispersed around this country. He seems to feel that all Inland Revenue matters should be dealt with by people in London and the south-east of England in their friendly neighbourhood offices, so to speak.
Slightly later in his speech he also encouraged me to look for economy in public administration. Partly for the sake of economy in public administration and partly based on the principle of attempting to bring jobs to the most seriously disadvantaged parts of the country, for many years now governments of both political complexions have attempted to disperse jobs around the country. Many of the Inland Revenue jobs which have been dispersed are very valuable in the local economies where they are based; for example, in Glasgow. Jobs in my department, the Department of Social Security, have been resited in, for example, the Blackpool area in order to provide important employment opportunities there. The Contributions Agency is based in Newcastle.
1750 I do not subscribe to the view that everything should be based in London and the south-east of England because the majority of people live there. Both for the integrity of the Union and for economy in public administration, to quote my noble friend, it is foolish to base everything in the most expensive part of the country; for example, as regards rent, property and labour costs. Therefore, I am afraid that my noble friend will not be surprised to hear once again that I disagree with him profoundly about the point that he made in relation to the relocation of Inland Revenue offices.
§ Lord Boyd-Carpenter
My Lords, I am much obliged to the Minister for his reply. Of course, he has no doubt deliberately over-stated what I said. I did not say that all the tax collection machinery should be in the south of England. But I did suggest that to remove the Inland Revenue and so on from an area where a large proportion of the population lives was making the tax system much more oppressive because people could not make quick personal contact with those who interpret the law and interpret what are their liabilities.
It is a fact, which my noble friend has now admitted, that the Government have deliberately moved the Inland Revenue, thereby adding to the costs of administration and to the difficulties of taxpayers in a large section of the country.
§ Lord Mackay of Ardbrecknish
My Lords, I do not believe that it has in any way added to the difficulties. It has made good sense for the Union and for economy of administration. I do not believe that many people need or want to visit their local tax office. They either want to communicate with it as little as possible or communicate by telephone or letter. I do not believe that it is nearly the problem that both today and in the past my noble friend has made it out to be.
I turn to the point of the two reports; namely, the simplification of tax legislation. The Revenue will not carry out that work alone or in isolation. The widest possible consultation is essential in order to ensure that genuine user-friendly legislation is produced by the rewrite. The Revenue consulted widely with the professions and business when preparing its report and is committed to maintaining that approach. There will also be close consultation and involvement of parliamentary counsel.
It is clear that there will be a formal consultation procedure for the long-term project. The Revenue will discuss the options informally with the representative bodies in the next few months. The Revenue also intends for the final rewrite team to include recruits from the private sector to provide a different and useful viewpoint on that work.
The next major stage in the rewrite project will be the publication of a consultative document later this year. That will give more details on the proposals and seek views of interested parties on the way forward. It will cover such areas as the case for restructuring for the Taxes Acts, drafting styles, priorities for rewriting and consultation arrangements.
The Government have already begun work to consider the various procedural options available. One option which it is clear even at this stage is not available 1751 is the consolidation procedure. The noble Lord, Lord Taverne, drew our attention to paragraph 3.6 in the Inland Revenue's summary. This is because the wording of the legislation will be changed and some minor policy changes will be involved.
In his introductory speech my noble and learned friend Lord Howe suggested a Special Standing Committee of both Houses. We shall have to give attention to how Parliament as a whole deals with the changed legislation as it is brought forward. I am grateful to your Lordships for the suggestions which have been made on how Parliament should be involved. I am grateful also for the suggestion that this House should be involved in consideration of those matters. Because of constitutional arrangements, we are not involved in the consideration of finance matters, but your Lordships have made a good point that we could have a useful role to play in looking at the changes which that rewrite will bring forward.
It will be helpful to have a better idea of how the rewrite is developing and what the rewritten legislation will look like before making a final decision on the most sensible procedures to use in Parliament. There should be very important benefits for business and taxpayers from the project. The overall reaction of the representative bodies, and your Lordships this afternoon, is that quite clearly they see that the benefits should substantially outweigh the costs. The benefit to all users will come from tax law which is easier to understand and can be grasped more quickly. There should also be benefits to taxpayers who use professional advice or guidance material from the improvements in advice from practitioners and the Revenue. The benefits will be of particular importance under the system of self-assessment which starts in April 1997. This system will place more responsibility for getting their tax affairs right on the 9 million or so people it will cover.
The project will contribute to the Government's deregulation initiative aimed at reducing the costs to business of complying with legislation. It will also contribute to the Inland Revenue's continuing efforts to improve customer service.
In conclusion, there is clearly a lot of work being done, and needing to be done, and it will take time to get it right. The first tranche of rewritten legislation should be ready around the end of 1997. It is a major task, but this project is clearly a worthwhile one which deserves the widespread support it has attracted, and I am pleased to see that that widespread support was echoed from all parts of your Lordships' House this afternoon.
§ 6.19 p.m.
§ Lord Howe of Aberavon
My Lords, in closing the debate, I thank all noble Lords who have joined in the proceedings and in particular those who have extended their thanks to me for initiating the debate. I particularly appreciated the generosity of the language used by two of the most—if I may borrow the adjective—Jurassic ex-Treasury Ministers who joined in the debate; namely, my noble friend Lord Boyd-Carpenter and the noble and 1752 learned Lord, Lord Simon of Glaisdale. They were very generous in their remarks about me and I appreciated the wisdom that they brought to our proceedings.
As always, I enjoyed the contribution made by my noble friend Lord Cockfield. He did not disappoint me because, as usual in our many discussions, he was able to refer to his experience in dealing with the management of taxes dating back to World War I, World War II and the Korean War. My noble friend has never been lacking in depth of experience of that kind. In fact, my noble friend was in an unusually Elysian mode for him. He talked almost hopefully about the prospect of our being able to achieve such a simple, allowance-free low tax system. I entirely agree with my noble friend about its desirability. I also very much value the help that he gave me in trying to move in that direction in the simplifications that we did make; for example, in abolishing the reduced rate ban, which was reversed some time later.
However, we struggled in vain to challenge the principle of mortgage interest relief, which is an allowance of huge size with huge complications, because it is relatively popular. I was also struck by my noble friend's visionary insight into the world in which we might actually tolerate a general anti-avoidance provision of the kind visualised by the noble and learned Lord, Lord Simon of Glaisdale. Indeed, it would be marvellous if public opinion reached the point where such a provision became tolerable. But I hesitate to believe that it will be with us very quickly.
I recollect the occasion when the then chairman of the Board of Inland Revenue was giving evidence to the committee in the other place which deals with Treasury and Civil Service matters. He was asked the rather telling question, "Tell me Sir Lawrence"—for that was his name—"do you pay your window cleaner in cash?". He was compelled to answer that in the way in which I suspect all of us would be obliged to do. Nevertheless, that is the right objective to set ourselves.
Two of the non-Treasury Ministers—the minority taking part in the debate—were in fact my noble friend Lord Ashburton and the noble and learned Lord, Lord Brightman, who both focused on capital gains tax. It is now far too long a time since I last wrestled with the subject for me to begin contending with them on the detail. My noble friend Lord Ashburton is only relatively innocent when compared with former Treasury Ministers, but, as a former chairman of a merchant bank, a former chairman of an insurance company and a former chairman of our large oil company, he is quite a sophisticated fellow. He drew from CGT two points: first, that our noble friend Lord Lawson had got it wrong by simplification; and, secondly, he put forward proposals to improve the situation—the graduation of CGT—which would have added greatly to its complexity. It was a remarkable but nevertheless stimulating and interesting contribution.
The point that I would prefer to take from the noble and learned Lord, Lord Brightman, relates to his experience in chairing the Jellicoe Committees which 1753 have been functioning in this House over the past two or three years. He has played a pioneering role in that respect. I believe that those committees represent the shadow of what we would need to construct, embracing Members of both Houses. I was very glad that my noble friend Lord Shaw was one of several speakers who emphasised the desirability of engaging Members of your Lordships' House in that joint task for the future.
I was delighted that the noble Lord, Lord Taverne, and my noble friend Lord Hayhoe also endorsed—as, indeed, did the noble Baroness, Lady Seear—the idea of a special Standing Committee as being the right vehicle for tackling the matter. I very much hope that that central point will be taken on board. I believe that it was endorsed by the noble Viscount, Lord Chandos, in a speech, if I may say so without undue condescension, of high quality from the Front Bench of the party opposite in summing up such a debate.
However, I am glad to say that it did not match the quality that we have long since come to expect from my noble friend the Minister who wound up the debate. I was struck by my noble friend's modesty and I share his instinct in preferring reference to be made to explanatory memoranda rather than to speeches made by Ministers. I particularly welcome, as I am sure the whole House did, the firmness of his commitment on behalf of the Government to proceed with the matter with the seriousness and the urgency that it deserves.
I am delighted with the welcome given to the proposition. I beg leave, not before time, to withdraw the Motion.
Motion for Papers, by leave, withdrawn.